V Balance in Expenditure Composition
- Peter Heller, and Alan Tait
- Published Date:
- April 1982
From a policy perspective, it is often argued that countries tend to economize on nonwage forms of current expenditure, particularly when faced with a budgetary squeeze. Excessive current spending relative to capital expenditure is also inveighed against. If these hypotheses were true, the expectation would be that countries would exhibit higher IEC indices for wages relative to their indices for other purchases of goods and services—and, similarly, for current expenditure relative to capital expenditure.
Despite the danger of interpreting a cross-section study as a time series, it was thought worthwhile to test the above hypothesis. The following measure was calculated (Table 9). The ratio is shown as:
|Ratio of IEC Indices for||Ratio of IEC Indices for|
|Country||Other goods and services to wages (B1)||Current expenditure to capital expenditure (B2)||Wages to subsidies (B3)||Goods and services to subsidies (B4)||Country||Other goods and services to wages (B1)||Current expenditure to capital expenditure (B2)||Wages to subsidies (B3)||Goods and services to subsidies (B4)|
|Costa Rica||2.70||0.60||1.66||1.76||Papua New Guinea||…||3.75||…||2.65|
|Germany, Fed. Rep.||…||1.04||…||1.42||Sri Lanka||1.07||0.60||0.73||0.74|
|Jordan||…||0.83||…||1.29||United Arab Emirates||…||0.17||…||…|
If B1 is more than unity, it suggests a tendency toward overemphasis on other goods and services relative to wages, compared with what might have been predicted.15 A set of other comparable B measures have been tested as well:
representing, if B is greater than unity, a tendency to overemphasis on current expenditure relative to capital expenditure (B2), wages relative to subsidies (B3), and goods and services relative to subsidies (B4).
The cross-country patterns were revealing. Focusing on the countries where B1 is more than 1.05 or less than 0.95, the study found that the wage imbalance hypothesis cannot be confirmed. With the exception of the Asian region, half the countries appear to overspend on wages, while the remaining half overspend on other purchases of goods and services. Only in the Asian region is there a clear bias toward overemphasis on purchases of other goods and services relative to wages; it was found that, in this region, B1> 1.05 in more than three fourths of the countries.
Examining next the relative balance of current and capital expenditures (B2), the study found a more varied pattern. In Africa and the industrial countries, a clear bias was found toward relative overspending on current relative to capital expenditure. On the other hand, almost two thirds of the Latin American and Middle Eastern countries had B2 indices less than 0.95, suggesting a higher weighting of capital expenditure than would have been predicted.
In comparing wages with subsidies and transfers, greater emphasis on subsidies was found in Africa and among the industrial countries. More than two thirds of the African countries attached a higher weight to subsidies vis-à-vis wages than would have been predicted. The reverse was true in the Latin American region. The weight attached to all purchases of goods and services vis-à-vis subsidies also verified the above relationship in Latin America and Africa based on the calculation of B4.